The 2025 Tariff Shock

(SPEECH)

This session is closed to the press.

(DESCRIPTION)

Logo: JP Morgan.

(SPEECH)

Welcome to the JP Morgan Webcast. This is intended for informational purposes only. Opinions expressed herein are those of the speakers and may differ from those of other JP Morgan employees and affiliates.

Historical information and outlooks are not guarantees of future results. Any views and strategies described may not be appropriate for all participants and should not be intended as personal investment, financial, or other advice. As a reminder, investment products are not FDIC insured, do not have bank guarantee, and they may lose value. The webcast may now begin.

(DESCRIPTION)

Dark gold-tone metal arcs and swirls through black. A handwritten A catches the light as the animated ink moves on the black background.

(SPEECH)

[MUSIC PLAYING]

(DESCRIPTION)

Logo: JP Morgan, Title: Ideas and insights. Speaking is a man in glasses, with light brown hair over a dark gray blazer and blue collared shirt, to the left of the Title: Liberation Day Aftermath, April 2025. Michael Cembalest, Chairman of Market and Investment Strategy, JP Morgan Asset and Wealth Management.

(SPEECH)

Good morning, everyone. And welcome to the Liberation Day aftermath webcast. I'm going to get into the details in a minute. I think the big burning question that I think a lot of us have is, what is the president truly aiming for?

Are they aiming for a fairer global trading system, which may not have any impact on bilateral trade deficits? Or are they looking to reduce those bilateral trade deficits, no matter how they can and reengineer repatriation of US manufacturing and production?

Those are two very different things. And while tariffs might be a part of one of them, it probably wouldn't do anything for the other one. And so that's the really big question for investors and for markets and everybody else. So let's dive into this. Thank you for joining.

(DESCRIPTION)

Cembalest gestures with a device in his right hand.

(SPEECH)

OK, so if we look at-- oh, there we go. Let me go back. If we look at

(DESCRIPTION)

The slide on the right changes past an AI-generated image of a chemist in a red ball cap to a graph, then back. Heading: The alchemists and a 10 to 15 percent stock market decline.

(SPEECH)

the cover of the outlook this year, we thought that tariffs were going to be part of this alchemist mix and that would result in a 10% to 15% stock market decline. To some extent, this is starting to feel a little bit like 2008, where we started the year bearish and underweight on equities but had under anticipated the severity of the financial crisis and certainly hadn't anticipated the conservatorship of the GSEs, which was announced in September of that year.

So but we've gotten that 10% to 15% stock market decline. There are some interesting technicals, which tend to kick in at around these levels, which we'll discuss. But I want to go through some of the fundamentals first because I think it's really important to understand.

(DESCRIPTION)

Heading: Declines in CEO optimism and capital spending. Shown is a graph with Heading: US business optimism and capital spending tracker index. X-axis: Year, from 2006 to 2025 in increments of two. Y-axis: Index, from negative 200 to 150 in increments of 50.

(SPEECH)

So here's to start.

(DESCRIPTION)

A blue line tracks from around 100 in 2006 to negative 60 in 2025, with a dip below the X-axis in 2009 and at the axis in 2020. The highest peaks are in 2018 at 140, and in 2021 at 125.

(SPEECH)

Declines in CEO optimism and capital spending were already taking place before all the tariff stuff hit.

(DESCRIPTION)

Heading: Weakening leading indicators. Shown is a graph with Heading: ISM new orders less inventories. X-axis: Year, from 2018 to 2025 in increments of two. Y-axis: ISM manufacturing index, from negative 10 to 20 in increments of 5.

(SPEECH)

So this is our business optimism and capital spending tracker. It had already rolled over in reaction to some of the administration's policies.

(DESCRIPTION)

A blue line tracks from around 15 in 2018 to around negative 9 in 2025, dipping below the X-axis in early to mid 2020 and peaking at 20 just before 2021, with another dip around negative 8 from mid 2022 to early 2023.

(SPEECH)

Similarly, our favorite leading indicator, which looks at new orders in the ISM Manufacturing Survey, less inventory accumulation. That had rolled over pretty hard by the end of March.

(DESCRIPTION)

Heading: Weakening corporate profit signals. Shown are two graphs. Left Heading: S&P earnings revision breadth. X-axis: Year, from 2022 to 2025 in increments of 1. Y-axis: Percent, from negative 30 to 15 in increments of 5.

A blue line dips from above 15% in 2022 to around negative 20 in 2023, rising to just below 5% in late 2023 and wavering around 0% into early to mid 2024, then dipping to negative 20 in 2025.

Right Heading: S&P 2025 consensus EPS growth versus 2024. X-axis: Month, from March 2023 to March 2025 in increments of 4 months. Y-axis: Percent, from 0 to 22 in increments of 2.

A legend on the graph shows blue line Text: Reported, yellow line Text: Operating. Both start around 10% in March 2023 and mirror each other's rise and fall. The blue line peaks higher in November 2024 around 21% before dipping to around 17%, and the yellow around 13% around July into August 2024 before dipping to around 10%.

(SPEECH)

And then if we look at corporate profit signals, we were seeing already, before the tariff announcements, a rollover in earnings revisions breath, in other words, more earnings downgrades than upgrades, and a weakening and consensus earnings growth expectations for this year.

(DESCRIPTION)

Heading: And a recent surge in announced job cuts. Shown is a graph with Heading: US announced job cuts. X-axis: Year, from 2000 to 2025 in increments of 5. Y-axis: Thousands monthly, from 0 to 300 in increments of 50.

(SPEECH)

And then

(DESCRIPTION)

A blue line traces from 50 in 2000 and peaks around 250 near 2001, again near 2009, above 300 near 2021, and ends near 275 in 2025. Between peaks, the line wavers down to levels from around 100 to near 50, with a low near 15 around 2022.

(SPEECH)

on top of all that, just last week, there was a huge spike in announced job cuts that challenge [? are in great ?] track. So all of these things are already happening by the time we got the tariff announcements. And the

(DESCRIPTION)

Heading: The new rules of the game, for now, will compound these headwinds. Bullet 1: 10% minimum tariff and higher reciprocal tariff on 59 countries, subject to bilateral negotiations. Bessent: "Don't retaliate or they will go higher."

(SPEECH)

new rules of the game on tariffs are going to compound all of these headwinds, for the US and also for the global economy.

So let me just walk quickly through what was announced. Everybody's read it by now, 10% minimum tariff on everybody and a higher reciprocal tariff rate on 59 countries, subject to what may now be around of bilateral negotiations.

Bessent has been warning them, don't retaliate or they'll go higher. He has been a quote machine. We have some fantastic quotes from him later in the deck.

(DESCRIPTION)

Bullet 2: Reciprocal tariffs. Steel, aluminum, autos are highlighted in red, copper and lumber in yellow, pharmaceuticals, semiconductors, critical minerals, energy products in green.

(SPEECH)

So the reciprocal tariffs exclude certain products that have been subject to tariffs or sectoral tariffs already, such as steel, aluminum, and autos. They don't apply to copper and lumber, whose tariffs are pending. And they don't apply to things like pharmaceuticals, semiconductors, critical minerals, and some energy products, yet.

(DESCRIPTION)

Bullet 3.

(SPEECH)

Canada and Mexico were exempted, along with Russia, Belarus, Cuba, and North Korea.

(DESCRIPTION)

Bullet 4: Only applies to non-US content of goods, if at least 20% of the content is US-origin, mostly a Canada-Mexico issue.

(SPEECH)

And the tariffs only apply generally to the non-US content of goods.

(DESCRIPTION)

Bullet 5: When a semiconductor is manufactured and packaged into a separate system, it could be subject to a different tariff without exemption, i.e. within an add-in card, computer or server rack.

(SPEECH)

Some of the details still have to be worked out. For example-- and this is a really important-- when a semiconductor is manufactured, and it's packaged into a separate system, like an add-in card or a server rack, is that going to benefit from semiconductor exemptions or not? Nobody knows yet. So we're still waiting for the details on that.

(DESCRIPTION)

Heading: Mission accomplished. X post, Bill Ackman: Sometimes the best strategy in a negotiation is convincing the other side that you are crazy. 7:27 AM, 4/3/25.

(SPEECH)

Now, regarding the administration strategy, Bill Ackman was quoted as saying, sometimes the best strategy in negotiation is convincing the other side that you are crazy. Mission accomplished, Bill. I think they've done that. So let's look at why.

(DESCRIPTION)

Heading: The econometric formula heard around the world. Red Text: Max open parentheses 10%, open-close parentheses imports-exports, divided by open-close parentheses imports times K, close parentheses, where k equals 1 assuming an elasticity of import prices to tariffs of 0.25 and a price elasticity of import demand of 4, and then divided by 2 open-close quotes just because.

(SPEECH)

The econometric formula heard around the world-- there's been a lot of discussion about this formula, which looks at imports and exports and allegedly includes the elasticity of import prices to tariffs and the price elasticity of import demand. There has been a wide range of criticism of this approach from a very diverse, heterogeneous group, from Paul Krugman to Scott Lincicome of the Cato Institute, who normally, those people don't talk to each other, Erica York from the Tax Foundation, Cliff Asness from AQR, Maurice Obstfeld from the Peterson Institute.

I had a bunch of their pithy and critical responses.

(DESCRIPTION)

Quote: Trump's tariffs are designed for maximum damage, to America. Maurice Obstfeld.

(SPEECH)

Our compliance people didn't want me to include them because they felt they were one-sidedly negative. So I don't do that. I will tell you this.

I was contacted this morning by Brett Neiman from Chicago's Booth School, who wrote a paper in 2021 about elasticity of import prices to tariffs.

(DESCRIPTION)

Red Text: Oops. According to the American Enterprise Institute, the White House misread the paper it cited and should have used 0.95 as the elasticity of import prices to tariffs, and not 0.25, in which case no reciprocal tariff would have been higher than 14%. Open-close three exclamation points.

(SPEECH)

He said that the number the administration should have used was 0.9 instead of 0.25. And had they read his paper and interpreted it correctly, none of the tariffs would have been higher than 14%. And most of them would have been 10% at most.

And so they didn't even get the formula application right. And so that's not a confidence builder in how this approach is working so far. And

(DESCRIPTION)

Heading: Why the negative response? Tariff rates and non-tariff barriers don't appear anywhere in the formula. Two charts are shown.

Left table Heading: Tariff differential and Liberation Day reciprocal rates for US largest trade deficit pressure. Four column Headings: Country, Tariff rate differential, Announced reciprocal rate, US bilateral goods deficit. First row China, 1%, 34%, $295 billion. 15th row Indonesia, 5%, 32%, $18 billion.

(SPEECH)

the bigger reason why it's not a confidence builder is because tariff rates

(DESCRIPTION)

Right bar graph Heading: US versus largest trade deficit partners trade barrier index. Trade barrier index, 6 equals highest barriers. From Japan, lowest at just below 3, to India at 6. US shown in red, just above 4.

(SPEECH)

and non-tariff barriers, which the administration claimed were the driving forces behind the need for tariffs, don't show up anywhere in the formula, right?

(DESCRIPTION)

Left table 10th row India, 12%, 26%, $46 billion.

(SPEECH)

The table on the left shows the bilateral tariff rate differential, which is generally in the single digits versus most countries. And it's tiny compared to the bilateral tariff rates that are being used in the reciprocal tariffs. Now, the administration might say, yeah, that's because all the non-tariff barriers aren't captured in there. Fair enough.

But when you look at a comparison of the US compared to the 15 largest trading partners, the US is right in the middle in terms of overall barriers to trade. And as we'll show later, the US applies plenty of non-tariff barriers of its own.

So the bottom line is, they came up with a formula for tariffs that has very little to do with bilateral tariff differentials and non-tariff barriers. And there's a lot of questions about whether or not the approach that was used is going to affect the bilateral deficits at all.

(DESCRIPTION)

Heading: Unfair to Heard and McDonald Islands, no reciprocal tariffs on Russia. Line graph Heading: US imports on Russian goods. X-axis: Year, from 1992 to 2022 in increments of 5. Y-axis: US $, billions, from 0 to 35 in increments of 5.

A blue line rises from 0 in 1992, rises steadily to a peak around 26 near 2007 and 2008, dips and peaks again near 35 around 2012, then dips at 2017 and wavers to another peak around 30 in 2022 before dropping to below 5.

(SPEECH)

One particularly interesting part was there was no reciprocal tariff rate applied to Russia, even though we still import about 3.5 billion from Russia, which is unfair to places like the Heard and McDonald Islands.

Now, I've invited the trade representatives of the Heard and McDonald Islands to join me on the call just for a minute.

(DESCRIPTION)

To the right of the speaker are shown two images of cuddly toys, the shorter on the left resembling a chinstrap penguin and the taller resembling an emperor penguin.

(SPEECH)

As they're penguins, they don't really speak. And so they've entitled me to lobby a complaint on their behalf, which I'm now formally doing. Thank you very much for joining us.

And I just want to--

(DESCRIPTION)

Heading: Tariffs mostly targeting the EU and Asia rather than the Americas. Table heading: Liberation Day reciprocal tariffs versus share of US imports. X-axis: Share of US imports, from 0 to 20% in increments of 5. Y-axis: Reciprocal tariff rate, from 0 to 50% in increments of 10.

(SPEECH)

the three of us are going to present this next slide. The tariffs are mostly targeting the EU and Asia rather than the Americas. And there's a handful of countries here-- Japan, Korea, India, Malaysia Taiwan, obviously China and the EU, where this matters the most.

(DESCRIPTION)

Japan at 5, 25. South Korea at 5, 26. India at 3, 27. Malaysia at 2, 25. Taiwan at 4, 36. China at 14, 35. EU at 18, 20. Red dots: Russia at origin, Heard and McDonald at 0, 10.

(SPEECH)

The Heard and McDonald Islands are on the left. They got a 10% tariff. And as you can see, Russia got a 0.

So where does that leave us in terms of where tariff rates now are on a weighted average basis?

(DESCRIPTION)

Heading: Kaboom, highest tariff rate since 1910. Table: Average tariff rate on all US imports. Assuming no elasticity of imports due to higher tariff rates. X axis: Year, 1900 to 2025 in increments of 25. Y axis: 0 to 30% in increments of 5.

A blue line starts just below 30% on the Y-axis, dips to just above 5 around 1920, peaks around 20 near 1930, then dips to just above 5 after 1950 and trends down to near 3 at 2025. Red dot: Announced reciprocal tariffs, incorporating product-country exclusions and preexisting, non-stacking product-specific tariffs, near 22 in 2025.

(SPEECH)

Kaboom, we now have the highest tariff rate since 1910.

(DESCRIPTION)

JD Vance, Quote: Frankly, we could have gone a lot higher, but the president is trying to send a message that we're going to be a little kind. We're going to be a little discounted.

(SPEECH)

I guess we should be thankful. JD Vance was quoted as saying that we could have had even higher tariffs. They could have gone higher. But the president is trying to be kind. So I think we should all be thankful for that.

Anyway, thank you very much for joining. That's the end of their-- here's a fish.

(DESCRIPTION)

The speaker tosses a toy fish to the fake penguins.

(SPEECH)

So that's the tariff rate, which is now the highest since 1910.

(DESCRIPTION)

Heading: Kaboom, highest tariff duty share of GDP since 1870's. Tariff duty share of GDP since the Civil War, Assuming no elasticity of imports due to high tariff rates. X-axis: Year, from 1870 to 2030 in increments of 20. Y-axis, 0 to 3% in increments of 0.5.

(SPEECH)

If we go to look at tariffs as a share of GDP, they are the highest they've been since the 1870s.

(DESCRIPTION)

A blue line starts near 3% at 1870 and slopes steeply downward, dips to about 0.25 around 1920, then rises back to around 0.6 and slopes to level between 0.1 and 0.4 until roughly 2025. Red dot: Announced reciprocal tariffs, incorporating product-country exclusions and preexisting, non-stacking product-specific tariffs, near 2.5% in 2025.

(SPEECH)

So this is a very big shock. Now, we don't know if all these tariffs are going to stay. Some of them may get negotiated away. And we'll have to see. And there's really no way to anticipate that.

But assuming that they stick, this would be the largest tax hike since 1968 and one of the largest tax hikes in the postwar era,

(DESCRIPTION)

Heading: Tariff increase is the largest open-close quote tax hike since 1968. Chart Heading: Large US tax hikes, percent of GDP. X-axis: Year, 1941, 1942, 1951, 1968, 1982, 2025. Y-axis: 0 to 5% in increments of 1. Highest at 5% in 1942, at 2.5% in 1968. Red bar to 2.5% at 2025.

(SPEECH)

which is why so many economists on Wall Street are predicting 40%, 60%, 70% chance of a recession in the United States and also potentially globally.

| can't find a lot of economists that think this is a good idea. And I have a special list for the Eye on the Market that includes 30 or 40 of the top economists in the country. I spoke with a lot of them over the weekend. And none of them could figure out a reasonable justification for this.

(DESCRIPTION)

Heading: While I have not been able to find economists who think this is a good idea, the plan appears to have support in influential VC circles. X post, Marc Andreessen: Important, this is not a chart of tariff rates, but rather as a percent of all tariff revenue including taxes. Line graph with indistinct axes labels.

Bullet 1: Yes, but the size of the Federal government was a small fraction, 10 to 15%, of today's. Bullet 2: Leading superpowers in 1900, Russia, Austria-Hungary, Germany, France.

(SPEECH)

The plan does appear to have some support and influential VC circles. The last time Marc Andreessen, who and his colleagues were big supporters of the president's campaign, Andreessen mentioned and highlighted in a tweet late last year that the most fertile period for US industrial production innovation in its history was a period during from 1870 to 1910.

And, he says, the second Industrial Revolution, which was the most fertile era for technology development and deployment in human history, tariffs were 50% of total US Federal revenue collections. Yes, that's true. The problem is the size of the federal government was a small fraction of what it was today.

So the size of the federal government in 1870 was very tiny. The leading superpowers in the world at the time were Russia, Austro-Hungary, Germany, and France. And so I think it's really odd to reach back to the late 1800s as a justification for a system that swaps out income taxes for tariff revenues.

(DESCRIPTION)

Heading: Growth and inflation, not a lot of places to hide in a full-blown trade war. Two charts shown. Left Heading: Tariffs impact on GDP versus baseline scenarios, percent. X axis: Global, US, China, EU, Canada, Mexico. Y-axis: 0 to negative 4 percent in decrements of 1.

Legend: blue, limited trade conflict, yellow, full-blown trade war. Global between negative 1 and negative 5% and China between negative 2 and near 5% at yellow, US between negative 1 and 2% at blue, and Mexico between negative 2 and negative 3% at blue.

Right Heading: Tariffs impact on CPI versus baseline scenarios, percent. X axis: Global, US, China, EU, Canada, Mexico. Y-axis: 0 to 5 percent in increments of 1.

Legend: blue, limited trade conflict, yellow, full-blown trade war. Global between 1.75 and 3% at yellow, Canada between 3 and 5% at yellow, between 0.75 and 2.5% at blue. Mexico between 1 and 3.25% at blue.

(SPEECH)

And in terms of growth and inflation, it's hard to know. I don't have a lot of confidence in the tariff impacts on inflation because if the growth consequence is severe enough, you won't have any inflation. I have a lot more confidence that high tariffs, particularly in a full-blown trade war, will be depressive to growth, which is the chart on the left.

(DESCRIPTION)

Heading: US economy, zero recession indicator risks as of February 2025, US has been outperforming the rest of the OECD for many years. Line graph Heading: NBER Recession indicators, count of indicators with three consecutive negative MoM readings. X-axis: Year, 1967 to 2017 in increments of 10, to 2025. Y-axis: 0 to 6 in increments of 1.

A blue line peaks around 5% near 1975, near 1979, and near 2008, with most spikes near 1%. Bullet: Poorest US state, Mississippi, per capita GDP higher than France, Spain, and Italy, very close to Germany.

(SPEECH)

Now, let's get into why this is all happening. As of the end of February, there were zero recession indicators flashing red in the US economy. We track them. There's eight possible signals. Zero of them were flashing red. So the economy was in pretty good shape at the end of February. And the US has been outperforming the rest of the OECD for many years.

And some of you may have seen there were some statistics that came out. The poorest state in the United States, Mississippi, has a per capita GDP that's grown to be higher than France and Spain and Italy and is close to Germany. So from a broad macroeconomic perspective, it's hard to see the justification for completely remaking the global trading system.

(DESCRIPTION)

Slide change.

(SPEECH)

So why are they doing this? Here's a picture of Trump staring into the sun during the eclipse. Why are they doing this?

(DESCRIPTION)

Heading: Dirty Harry explanation circulating online, tariffs are a deliberate attempt to torpedo the US economy in order to allow for cheaper Treasury-Corporate debt refinancing.

(SPEECH)

I do want to start out by saying that there's an explanation circulating online, and which Trump himself has lent some credence to by the things he's tweeted, that there are deliberate attempt to torpedo the economy and the market in order to allow for cheaper Treasury and corporate debt refinancing. So

(DESCRIPTION)

Bullets.

(SPEECH)

you deliberately inflict some pain in order for some unrelated gain.

I saw this plot once in the movie Dirty Harry in 1971. My father took me to see this. It's the same plot as that movie. This guy, Scorpio, pays someone to beat him up so then he can blame detective Callahan, who gets fired from the San Francisco Police Department.

It didn't work so well. It didn't work out well for Scorpio. He ends up dead in the lake by the end of the movie. And I have a feeling if this is anybody's rationale for the reason you're putting on these kind of tariffs, it's going to work out just as badly.

(DESCRIPTION)

Heading: The White House party line, tariffs are part of a plan to address persistent US trade deficits, stagnating production and falling manufacturing share of employment.

(SPEECH)

Now, let's go to the White House party line, which is the tariffs are part of a well thought-out, difficult adjustment

(DESCRIPTION)

Table Heading: The Silence of the Plants. Index, 100 equals 2000. Line Legend: Green, US consumer spending, Yellow, US GDP, Red, US industrial production. X-axis: Year, from 1930 to 2025 in increments of 10. Y-axis: 0 to 180 in increments of 20.

(SPEECH)

that's required to address persistent US trade deficits, stagnating industrial production, and a falling manufacturing share of employment. And I've written about a lot of these topics for years.

(DESCRIPTION)

Vertical dotted line Text: China joins WTO, early 2000's. Three lines slope up together from near 10 to near 100 until the vertical line, where the red line diverges to end around 115 while the green and yellow rise to near 180.

(SPEECH)

And it is very disturbing, particularly when you see the juxtaposition of when China joined the World Trade Organization, to see how consumer spending and GDP continue to advance and US industrial production has been stagnating with all sorts of negative impacts on some of those communities affected.

But that has a lot to do with distribution of income and redistribution of income rather than tariffs and the dollar and macroeconomic policy.

(DESCRIPTION)

Heading: The origins of US trade deficits and industrial stagnation are complicated. Chart Heading: US goods trade balance to GDP. X-axis: year, from 1800 to 2000 in increments of 25. Y-axis: Percent, from negative 8 to 6 in increments of 2.

(SPEECH)

The origins of US trade deficits and US industrial stagnation are very complicated. And what concerns me is this kind of sledgehammer, brute force approach that tariffs are going to solve this problem may not work. This is an enormous gambit.

So let's take a look at the history. A century of consistent US trade surpluses, which began in 1870, ran for 100 years. But they ended sharply when the US went off the gold standard. And that was the end of the Bretton Woods system, where that fixed exchange rates to the dollar, and the dollar was pegged to gold.

(DESCRIPTION)

A blue line rises from around -4% to curve near 0 with a peak at 6% around the 1920's, then curves down to end around -4%. A dotted vertical line shows around 1975 with Text: End of Bretton Woods system.

(SPEECH)

After that, Bretton Woods system ended, demand for dollar assets soared because central banks were trying to prevent their currencies from appreciating, and global investors wanted to buy lots of US assets because of higher US growth and productivity. And as two examples of what I'm talking about, foreign holdings of treasuries rose from just 3% in 1970 to 35% in 2015. And foreign holdings of US corporate stocks went from 4% and quadrupled from 1965 to 2019.

Now, those massive capital account inflows, which are a capital account surplus, is one of the counter balances to why the US has been running these persistent trade deficits. And I don't know that tariffs are going to do anything about these underlying macroeconomic identities.

(DESCRIPTION)

Headings: Tariffs and NTBs also play a role but so do fiscal deficits and comparative advantage. Two charts are shown. Left Heading: Number of new global non-tariff policy measures. X-axis: from 1996 to 2020 in increments of 1. Y-axis: from 0 to 3500 in increments of 500.

Legend: Technical barriers to trade, yellow, Sanitary and phytosanitary measures, blue. From near 100 in 1996 to near 1000 in 2020 for blue, from near 600 in 1996 to near 3250 in 2020 for yellow.

Right Heading: US tariff and non-tariff measures by industry. Three column headings: Industry, Average Tariffs, Share of imports subject to non-tariff measures. Highest average tariffs for Textiles and Clothing, Footwear and Headgear at 11%. Highest share of imports for Animal, Vegetable, and Food Products at 100%.

(SPEECH)

Tariffs and non-tariff barriers also play a role. But so do fiscal deficits and comparative advantage, right? So yes, there may be some countries with higher tariffs. And Yes, the non-tariff barriers may be an issue.

But look at this table. The US applies non-tariff barriers to 40% to 100% of the products in a lot of traded goods. So the United States is no saint when it comes to non-tariff barriers. And are really well thought-out reciprocal tariff would look at the net bilateral impact of both tariff and non-tariff barrier differentials.

And then the other thing about the stagnation of industrial production and declining manufacturing series of employment,

(DESCRIPTION)

Heading: And so do large automation-productivity gains since 1970. Line graph heading: Manufacturing share of employment. X-axis: Year, from 1970 to 2020 in increments of 10, to 2025. Y-axis: Percent, from 0 to 40 in increments of 5.

(SPEECH)

look at this chart. So Germany has experienced roughly the identical decline in the manufacturing share of unemployment as the US since 1970. And they have been running a trade surplus the entire time.

So the connection between trade deficits and manufacturing shares of employment is not super clear to me.

(DESCRIPTION)

Legend: Germany, yellow, US, blue. The yellow declines from 40 to near 20 in 2020, and the blue from near 20 to near 5 toward 2025.

(SPEECH)

There's a lot of studies out there. Most of the ones I've seen suggest that the majority of the decline in the manufacturing share of employment that's taken place over the last 20 or 30 years in developed economies is related to automation and productivity gains and not to trade.

For example, the real output of a US manufacturing worker has grown by a factor of eight over the last few decades. The same thing happened at agriculture, remember? The number of hours worked in agriculture has declined by 80% at the same time that US farm output has tripled.

And so productivity gains and automation are playing a huge role in some of the things that the administration is trying to fix with tariffs. And that makes me nervous because it may not work.

(DESCRIPTION)

Heading: The Trump rebalancing agenda, built on a foundation of high tariffs. Bessent: In the next few years, we are going to have to have some kind of grand, global economic reordering. The tariff gun will always be loaded and on the table but rarely discharged. What's happening with the market, it's more of a Mag 7 problem, not a MAGA problem.

Chart Heading: Really? Largest YTD declines. Numbers show from 18% Office REITs to 36% Automotives and Passenger Airlines.

(SPEECH)

And so anyway, let's look at what the Trump rebalancing agenda looks like. It's built on a foundation of high tariffs. And I've got some quotes here.

Bessent has said, in the next few years, we're going to have some kind of grand global economic reordering. I don't know how to feel about what some of Scott's been saying. He's also saying what's happening with the market, it's more of a Mag Seven problem than a MAGA problem.

To me, I'm seeing a lot of very large year-to-date declines in sectors that have nothing to do with the Mag Seven. So yes, the Mag Seven has declined more than the market. But there's a lot of weakness everywhere. And I think that statement holds water.

But anyway, let's take them at their word.

(DESCRIPTION)

Slide change.

(SPEECH)

What are the goals of this global economic reordering that they're trying to accomplish? They want the US external deficit to narrow due to fiscal tightening and a tariff-induced decline in imports, increased domestic investment. They want foreigners to build facilities in the United States, given our low tax rates, light regulatory policy, and cheap energy.

They want the domestic savings investment imbalance to shrink. They want public finances on a more sustainable footing and less reliance on foreign capital. And then, if necessary, they would create a sovereign wealth fund capitalized with gold-- and with this administration, it would almost certainly have crypto in it-- with the goal of ensuring a weaker dollar.

So that's what they're trying to accomplish.

(DESCRIPTION)

Heading: Jason Furman, Harvard, Obama Chair of Council of Economic Advisers.

(SPEECH)

This is the nicest thing that I could find that someone that I trust and respect has had to say about these policies. So Jason Furman was the chair of Economic Advisors. He's at Harvard. And I thought this was interesting.

He says, the tragedy and the puzzle of Trump is that he's trying to do something that too few presidents have had the courage to do, which is to incur a large, widespread, short-run pain, while being transparent about it in the service of some long-term gain. But Furman concludes the tragedy is that he's mistaken on the long run.

But you know what? So what Furman is essentially saying is, let's give the president some credit about having the courage to adopt a kind of painful pain-and-gain strategy. But he disagrees that the gains are going to materialize.

(DESCRIPTION)

Heading: Example of a pain-and-gain scenario, Volcker kills inflation. Line graph heading: Volcker rate hikes. X-axis: Year, from 1978 to 1986 in increments of 2. Y-axis: Percent, from 2 to 22 in increments of 2. Legend: 10 year red, fed funds rate blue, yearly core CPI yellow.

(SPEECH)

What does a pain-and-gain strategy look like? A lot of us join Wall Street around the time or shortly after Volcker killed inflation by raising the policy rate three separate times to 20%.

(DESCRIPTION)

The yellow starts at 6 and ends around 3, with gentle slopes peaking around 10 near 1981. The blue starts and ends at around 6, with jagged peaks highest at 20 around 1980 and in 1981, with a steep valley between 1980 and 1981.

(SPEECH)

That's what it took to kill the embedded inflationary momentum of the 1970s, which originated with Nixon and what he did to Arthur Burns at the Federal Reserve.

(DESCRIPTION)

The red starts and ends around 8, wavers to peaks around 14 in 1980 and 1984, with valleys between 1980 and 1981 and between 1982 and into 1985.

(SPEECH)

So that's an example of when you get pain and gain.

(DESCRIPTION)

Heading: But. Bullets.

(SPEECH)

The problem is the track record of import substitution economies, which is what they're trying to create here, is pretty poor. And there are big risks for investors if Trump and Lutnick and Bessent are wrong about what tariffs can and can't accomplish with respect to trade deficits and declining shares of US manufacturing employment.

So let me just quickly tick through what some of those risks are.

(DESCRIPTION)

Heading: Import substitution growth models were very popular in the 1970s and 1980s. Line graph Heading: References to import substitution. X-axis: Year, from 1950 to 2020 in increments of 10, to 2025. Y-axis: Percent of two-word phrases in Google's sample of English books: 0% to 0.00007% in increments of 0.00001.

A blue line starts at the origin and ends at 0.00003%, peaking around 0.00005 in 1970 and 0.00006 between 1980 and 1990.

(SPEECH)

So import substitution models, where you prioritize domestic production over imports, you use tariffs, non-tariff barriers, incentives, quotas, negotiations-- and this is one of those Google Trends searches-- interest in these import substitution models surged in the written literature in the '60s and '70s. A bunch of Latin American countries adopted the approach.

(DESCRIPTION)

Heading: But they led to a growth collapse. Line graph Heading: Latin America GDP growth. X-axis: Year, from 1950 to 2000 in increments of 10. Y-axis: Percent, yearly, from negative 4 to 10 in increments of 2.

(SPEECH)

And it didn't work.

So you can see the clear downshifting in GDP growth from the 50 to 70 to the post 1970 period and then

(DESCRIPTION)

A blue line wavers around a level yellow line at 6% between 1950 and 1970, then falls to another yellow line at 3% starting around 1975, then falls to negative 3 around 1983 before returning to waver around the level yellow line ending at 2000.

(SPEECH)

this kind of a wonky chart. But what it shows you is

(DESCRIPTION)

Heading: And were abandoned by the early 1990's. Table heading, Import substitutions, structural break years in Latin America, Density. X-axis: year, from 1970 to 2005 in increments of 5. Y-axis: 0.015 to 0.030 in increments of 0.05.

(SPEECH)

the years in which these import substitution models were abandoned by the countries that adopted them. And so by the early 1990s, this approach was gone. So what's happening here is a little bit of a resuscitation of a model that's already failed.

(DESCRIPTION)

A blue line starts at 0.027 in the 1970s, peaks near 0.028 around 1976, then falls to above 0.015 thereafter.

(SPEECH)

Let me show you, though, what the more specific risks are to the United States from the approach the administration is taking. And then we'll talk about some market stuff.

(DESCRIPTION)

Heading: Risk number 1, Tariff, price and production data for 2018 furniture tariffs did not work out the way the administration was hoping. Same for appliances and steel. Two line graphs are shown.

Left Heading: US duty rate for furniture imports and furniture price index. X-axis: January '17 to January '20 in increments of 6 months.

(SPEECH)

Risk number one,

(DESCRIPTION)

Y-axis left: 0 to 12 percent in increments of 2. Y-axis right: Index, 100 equals 2017, seasonally adjusted. From 99 to 104 in increments of 1.

Blue line with Text: duty rate on furniture imports, starts flat at the origin, then rises to peak at 10 around July 2019 and end at 7. Yellow line with Text: US furniture price index starts at 100, ends at 102, and peaks at 103.7 around January 2020.

(SPEECH)

the tariff lessons of 2018 are not helpful here.

(DESCRIPTION)

Right Heading: Industrial production for furniture and related products. Index, 100 equals 2017, seasonally adjusted. X-axis: January '17 to January '20 in increments of 6 months. Y-axis: 92 to 104 in increments of 2.

A blue line starts at 101.5, ends around 95, peaks around 102 in July 2018, and dips around 93 near August 2019.

(SPEECH)

Let's start with the furniture tariffs. They didn't work out the administration was expecting. The chart on the left shows the tariff line goes up. That's the gold line.

Then the price index goes up. So there was almost a 1 to 1 pass through of tariffs to import prices by the way, which is exactly what Brett Neiman from Chicago Booth called me about this morning was to say the administration misread the paper. The pass through was 1, not 1/4.

On the right, we look at the Industrial Production Index for furniture and related products. It went down. So if the purpose of the furniture tariff was to force foreign furniture manufacturers to eat the tariff, lower their prices, which would benefit domestic furniture production, it didn't happen in any way in the furniture business in the United States in 2018. And the same thing happened in appliances, like washing machines. And the same thing happened in steel.

And I read this morning in the Journal, the iPhone would probably increase by about $300 if all of the existing tariffs were put in place. And some early evidence from earlier this year when the tariff rate on China went up 10%, that's almost exactly the rate at which iPhone prices went up. Again, a 1 to 1 pass through.

(DESCRIPTION)

Heading: Risk number two, countries retaliate by targeting US services surplus, dominated by the most valuable US technology companies. Two charts are shown.

(SPEECH)

Risk number two,

(DESCRIPTION)

Left Heading: US trade balance in goods and services, Percent of GDP. X-axis: Year, from 1999 to 2023 in increments of 3. Y-axis: from negative 6 to 2 in increments of 1.

Legend: Blue, services from 0.8 to 1 with dip at 0.5 in 2002 and peak at1.2 in 2012. Yellow, Goods from minus 3.5 to minus 4.5, with notches in 4 at 2000 and 3.5 at 2009.

(SPEECH)

countries retaliate against the US by targeting the services surplus we run with them. Now, the US services surplus is smaller than the goods deficit. But why did the administration completely ignore its existence when coming up with its reciprocal tariff formula? The whole thing is mystifying.

(DESCRIPTION)

Right Heading: Real services trade balance by sector, 2023, 2022 US$, billions. From negative 50 to 300 in increments of 50. Red, Transportation from negative 50 to 0. Gray, Other from 0 to 10. Yellow, Travel from 10 to 40. Blue, Digitally enabled from 40 to 300.

(SPEECH)

The services surplus in the United States is dominated by the most valuable and highly priced technology companies. If you look on the right, and you look at the real services trade balance by sector in 2023, almost the whole thing was the digitally enabled companies. This is basically money management, finance, internet communications, technology, networking, and things like that. So we already started hearing some news over the weekend of countries retaliating against companies in the services sector that do business there.

Risk number three-- well, sorry. Before we go to risk number three, let's assume in risk number two that one of the consequences of countries retaliating against US companies is that the stock market goes down.

(DESCRIPTION)

Heading: The administration appears less concerned about the stock market decline given what Scott Bessent says about it.

Two charts are shown. Left Heading: US Stock ownership by income percentile, Legend: Blue top 1%, Yellow next 9%, Red upper middle to middle 90 to 50%, Gray bottom 50%. Right Heading: Stock ownership of US households and non-profits.

(SPEECH)

The administration, through its statements, has been remarkably cavalier about a declining stock market.

And one of the most disturbing things that I saw was an interview with Tucker Carlson-- which is already disturbing--

(DESCRIPTION)

X-axis: Year, 1990 to 2025 in increments of 5. Y-axis: US dollars, billions, from 0 to 50 in increments of 5.

X-axis: Year, 1950 to 2020 in increments of 10, to 2025. Y-axis: Equities as a percent of financial assets, from 10 to 50 in increments of 10. A blue line starts at 20, ends just above 40, peaks near 30 around 1970, then dips to 10 around 1980 before peaking again at 40 in 2000.

(SPEECH)

with Scott Bessent where he says, well, the top 10% of Americans own 88% of the stock market. And we're not really worried about the wealthy. So who cares what happens to the stock market? That statement is factually true and completely disingenuous. And I'm going to explain why.

It's shockingly understates the importance of equity prices on the average household for reasons here. According to the Fed data, 42% of all household assets in the United States were invested in stocks. And 62% of households own stocks. And that's before taking into account the impact of defined benefit pensions, which own stocks and which are backed by the taxpayer through the PBGC. So I was kind of shocked by this kind of statement.

And the other thing to think about is, who's more impacted by tariffs? Someone that has $20 million in the stock market, who can afford to lose half of it if necessary. Or what about somebody that only owns $100,000 of stock, but when coupled with Social Security, is what's going to get them through retirement? And so again, I thought this was a very disturbing, disingenuous way to approach the issue of the importance of the stock market.

And whether Bessent and the administration like it or not, the stock market is often highly correlated to economic growth, particularly when large moves occur.

(DESCRIPTION)

Line graph Heading: US stock market versus real GDP growth. X-axis: year, 1990 to 2025 in increments of 5. Y-axis left: Blue S&P 500 Percent yearly, minus 60 to 80 in increments of 20. Y-axis right: Yellow Real GDP Percent yearly, minus 10 to 15 in increments of 5. Peaks and valleys in blue and yellow lines occur in similar patterns.

(SPEECH)

And here, you can see the connection between changes in the S&P and real GDP. I mean, this is not new information. This has been around forever.

(DESCRIPTION)

Risk number 3: Producer price inflation rises since a lot of imports are intermediate goods. Chart heading: US goods trade deficit by category. X-axis: Year, 2000 to 2025 in increments of 5. Y-axis: US dollars, billions, from negative 140 to 0 in increments of 20.

(SPEECH)

The third risk is producer price inflation, since a lot of imports are intermediate goods. So this is a chart showing the goods trade deficit by category over time. A big chunk is not just autos but other capital imports.

So yeah, you can say, I don't really care if consumption is compressed.

(DESCRIPTION)

Energy blue, Capital goods yellow, Autos red, Consumer goods yellow, Purple other.

(SPEECH)

Not a lot of value added there for growth and productivity. But almost half of all US imports are capital goods inputs into other products or autos. And so I don't think you can be quite as indifferent about producer price inflation if it starts affecting those sectors.

(DESCRIPTION)

Heading: Prompting further declines in capital spending equipment. Two charts are shown. Left heading: US capex equipment deflator. Right heading: US real capex equipment.

(SPEECH)

And again, we're already seeing a decline in real capital equipment spending. And this could really clobber it.

(DESCRIPTION)

X-axis: Year, from 2015 to 2025 in increments of 2. Y-axis: Q-Q annualized rate, percent. A blue line wavers around 0 until 2021, where it grows more jagged around minus 2, then peaks to above 8 between 2022 and 2023, before declining toward 1 at 2025 and a projection to 8.

X-axis: Year, from 2015 to 2025 in increments of 2. Y-axis: Q-Q annualized rate, percent. A peak shows around 2018 at 12.5, then sinks below minus 10 around 2020 and peaks above 20 around 2021 before wavering between 0 and 10 thereafter and declining to minus 8 in 2025.

Heading: Risk number 4, outflow of foreign holdings of US assets after an unprecedented period of US exceptionalism. Two charts are shown.

Left heading: US net liabilities to foreign countries. X-axis: Year, from '14 to '25 in increments of 1. Y-axis: US dollars, billions, end of quarter values, not seasonally adjusted, negative 5 to 20 in increments of 5.

(SPEECH)

Risk four,

(DESCRIPTION)

Other investment, purple. Direct investment, yellow. Portfolio investment, blue.

(SPEECH)

outflow of foreign holdings of US assets after an unprecedented period of US exceptionalism. What is all of that?

(DESCRIPTION)

Right heading: Regions as a share of MSCI world market capitalization. X-axis: Year, from 1970 to 2025 in increments of 5. Y-axis: Percent of total MSCI World market capitalization. 0 to 70 in increments of 10.

(SPEECH)

Well, on the right, you can see that over the last decade and a half, the US has been doing extremely well in the stock market relative to Europe and Japan.

(DESCRIPTION)

Japan, red. Europe, yellow. US, blue. Yellow starts above and ends below 20, with gentle slopes to and from a peak near 40 around 2009. Red starts near 2 and ends near 8, with a sharp peak at 45 around 1990, a moderate decline to 10 around 1998 and a slow decline thereafter.

(SPEECH)

There's a lot of embedded gains. We've written a lot about high valuations. So to launch this kind of policy at a time after that's taken place, you really do run the risk of a lot of capital outflows.

(DESCRIPTION)

Blue starts near 67 and ends near 70, with dips to 30 at 1990 and 40 at 2010 around a peak by 60 near 2003.

(SPEECH)

The chart on the left looks at the net liabilities of the United States as a country

(DESCRIPTION)

Blue starts at 6 and ends at 18 with a peak near 13 around 2022. Yellow starts at negative 1 and ends above 5 with a peak near 5 around 2022. Purple starts just above 0 and ends at 4 with a hill near 3 around 2022 to 2023.

(SPEECH)

to the rest of the world. There's almost $20 trillion of portfolio investment and around $7 to $8 trillion of direct investments controlled by foreign entities of US assets. And it wouldn't take a lot of changes to the global order for a lot of those things to get sold off. And that would be a pretty painful adjustment.

(DESCRIPTION)

Risk number 5: one pillar of US restructuring plan involves spending cuts, but DOGE cuts of about $50 billion are small compared to $6.8 trillion in total government spending.

People as of March, 50K layoffs, including probationary employees. Another 200K layoffs identified in VA, Defense, IRS, US AID, HUD, CFPB. 75K of deferred resignations.

(SPEECH)

The fifth risk, one of the key pillars of the global reordering, the way that the White House has explained it, is a substantial decline in the fiscal deficit. OK, so far, DOGE cuts are around $50 billion, using a very rough estimate of layoffs, including probationary employees, and a large number-- I'm also including in this figure a large number of layoffs that have been identified in Veterans Affairs, Defense, the IRS, USAID, HUD, CFPB, and also 75,000 of deferred resignations.

It's a lot of people. It's very disruptive. Even ignoring the damage that it does to the economy, 50 billion of savings on 6.8 trillion of government spending is not the kind of adjustment that's really going to move the needle in a global economic reordering. And you can see that the overall cash withdrawals from the Treasury General Account in this year is really indistinguishable from what it's been in the last couple of years.

(DESCRIPTION)

Chart Heading: Cash withdrawals from the Treasury General Account. X-axis: January to April in increments of 1 month. Y-axis: US dollars, billions, 0 to 2.5 in increments of 0.5.

(SPEECH)

So if that's what DOGE leaves us with, I don't think it's really going to move the needle.

And then

(DESCRIPTION)

Heading: Risk number 6, Confidence when investing in America, is this consistent with broader objective?

(SPEECH)

the last thing, when I read that a part of the plan is encouraging foreign governments and entities and companies to invest in the United States, some of what the administration is doing doesn't really appear to be consistent with that broader objective. Reneging on prior trade deals, highly personalized legal grievances litigated against media companies and corporate law firms, tightening the domestic labor supply, threatening to scrap industrial policies that were passed on a bipartisan basis, like the CHIPS Act, slashing federal support for science and research, and then the need for individual entities to lobby for a special treatment. I don't think these things are consistent with the broader objective of the reordering that the administration says that they want to accomplish.

(DESCRIPTION)

Heading: What about the so-called Senate off-ramp?

(SPEECH)

So I got some calls over the weekend in terms of what could possibly derail this. And people started using the phrase, what about the Senate off-ramp? And I said, what's a Senate off-ramp? I know a lot of the senators need ramps at this point because they're older. But what does the Senate off-ramp.

(DESCRIPTION)

Heading: The White House is focused on reconciliation bill that may extend tax cuts and provide additional tax benefits to seniors, manufacturers, residents of high tax states, service workers, if it can be passed.

Chart heading: Budget reconciliation bill exploring the policy options. Scenario outcome, 2.7 trillion expansion of budget deficit over 10-year window versus CBO baseline, assuming $4 trillion instruction to Ways and Means Committee regarding allowable increase to net deficit.

X-axis: Spending cuts, TCJA expansion, Tax hikes, Tax cuts, Spending hikes. Y-axis: negative 3000 to 1500 in increments of 500.

(SPEECH)

Well, the White House has a Reconciliation Bill that they really want to get passed. And in addition to extending all the Tax Cuts, there's also some manipulations here. Please don't try to read this chart. I made it, but it's a nightmare.

But what it's meant to show is that the administration wants to do things like cutting student loans and $800 billion or so in Medicaid because they want to provide tax benefits to seniors, manufacturers, some residents of high-tax states, by raising the SALT cap, maybe exempting tips, things like that. This bill is very important to the White House.

The Senate off-ramp concept is that some senators would say, we're going to block passage of this bill unless the tariffs get radically rolled back.

(DESCRIPTION)

Spending cuts 0 to 1500, TCJA expansion to negative 2600, Tax hikes to negative 1750, Tax cuts to negative 2400, Spending hikes to negative 2750.

(SPEECH)

I personally don't think that would happen. But that's just conjecture on my part.

(DESCRIPTION)

Heading: Might some moderate GOP senators threaten to derail the reconciliation bill unless tariffs were scaled back? I doubt it but there does appear to be a pulse in pro-trade GOP factions. Chart heading: Most moderate senators in both parties, 118th congress, UCLA Voteview Liberal conservative scores.

(SPEECH)

This is a chart of who those senators might be.

(DESCRIPTION)

Y-axis: From negative 0.4 to 0.3 in increments of 0.1. Four GOP senators did vote for Kaine's bill to halt tariffs on Canada. GOP Rep Don Bacon of Nebraska plans to introduce legislation aimed at reclaiming Congressional authority over tariffs, Politico.

(SPEECH)

We plot the ideology of senators based on their actual voting histories in Congress. And

(DESCRIPTION)

10 each red and blue, with liberal blue above the 0.0 line and conservative red below.

(SPEECH)

there does seem to be a pulse in the pro-trade faction within the GOP.

Four senators, including Rand Paul, voted for Tim Kaine's bill to halt tariffs on Canada. And then representative Don Bacon in the House from Nebraska plans to introduce a bill aimed at reclaiming Congressional authority over tariffs. What's equally interesting to me is that you're starting to see lawsuits against the administration by right-leaning think tanks, some of whom have cut their teeth on some pretty interesting issues.

(DESCRIPTION)

Heading: Lawsuits against the administration by right-leaning think tanks.

(SPEECH)

One is the New Civil Liberties Alliance. Another one is the right-leaning Liberty Justice Center in Texas.

(DESCRIPTION)

A, IEEPA does not give Trump statutory authority to impose tariffs. B., Even if it did, there is no worldwide emergency that would justify these tariffs. Even if A and B were found to be legitimate, IEEPA is unconstitutional and violates the non-delegation doctrine from Congress.

(SPEECH)

There's a lot of legal mumbo jumbo on this chart. It basically, they're challenging Trump's statutory authority to impose the tariffs. And even if that is conceded, they're challenging the fact that there's a worldwide emergency that would justify them.

And even if that's granted, they would say that both of these things are unconstitutional because it violates the nondelegation clause of the Constitution in terms of taking powers away from Congress and giving them, without justification, to the executive branch. This is a pretty influential group that's filing this lawsuit. One of the lawyers was the counsel of record and the Supreme Court case where Chevron Deference was overturned. So these are some pretty experienced people. We'll see what happens.

(DESCRIPTION)

Bullets: Is an agency's implementation of Presidential tariffs subject to the Administrative Procedures Act? Courts are generally deferential to presidents on foreign affairs and in responses to emergencies, but the breadth of Trump's actions test the outer bounds of this theory.

(SPEECH)

And it's impossible to know whether they will get a temporary restraining order or what might happen. But this is going on in the background.

(DESCRIPTION)

Heading: An early read on country responses to US tariffs.

(SPEECH)

Now, how are countries responding so far to the tariffs? Obviously, it's early. All of them are still adjusting to the big cardboard cutout with their names and numbers on them. As a reminder, Mexico and Canada aren't involved because they weren't hit with any of these reciprocal tariffs.

According to our government relations team, the UK, India, and Australia are working on agreements. The EU has been signaling a combination of retaliation and openness to negotiation. I think what's going to be really hard is to get people, whether it's in Asia or Europe, to take a lot more American rice, beef, wheat and other commodities, because a lot of times, there are issues related to GMOs, chemicals in the food supply, and other things like that, which are getting in the way. But we'll see what can happen.

In Asia, a lot of the countries have already signaled that they're willing to negotiate. And Japan also opened the door to retaliating, but would be unlikely to do so in any major way. The exception to all of this is China, which matched Trump's tariffs, added 11 American companies to the list of unreliable entities, put additional constraints on their export of rare earths, and also said that it wouldn't buy any more chicken from American companies. So we'll see.

Again, as I started the call with, what I'm still confused with is, let's assume that a bunch of countries in Asia agree to lower their tariff and non-tariff barriers to very low levels, and the US does the same. Six months, a year later, the trade deficits are unchanged because they're influenced by all those other non-tariff related macroeconomic issues we discussed earlier in the call. What would the administration do then?

Because that gets to the real question is, is the administration really trying to just focus on leveling the playing field internationally? Or are they trying to eliminate US trade deficits? If it's the former, there's a lot more room for the markets to recover quickly than if it's the latter.

(DESCRIPTION)

Heading: Possible positive market catalysts after the selloff?

(SPEECH)

So what are some possible positive market catalysts after the sell off? As I mentioned, deals that are negotiated where the administration will declare victory if they can reduce some of these tariff constraints; falling energy prices, although I think it's interesting. So far, that's been mostly confined to oil rather than natural gas.

There's been another 50 basis points of Fed easing priced into the end of the year. You could also get some both Central Bank and fiscal easing in Europe and China. There's a lot of hopes for a big stimulus bomb coming in Europe, starting to see some of that already.

Bank capital reform in the US, for example, a reworking of the supplementary leverage ratio, which would give banks the ability to extend more credit, infrastructure permitting reform, and then maybe some modest incremental stimulus from a reconciliation bill. All of these things are possible. The big issue is, the markets were not set up for a global regime shift with practically no foundational support amongst global investors and economists. And the markets were just poorly set up for that if that's what we're going to have.

(DESCRIPTION)

Heading: Bank capital reform might include reworking of the Supplementary Leverage Ratio.

Chart Heading: SLR ratio increase assuming US Treasury carve-out. X-axis: Basis points, 0 to 100 in increments of 20. Charles Schwab near 90, American Express near 1.

(SPEECH)

Here's a chart on the bank capital reform. But right now, that's really a tertiary issue.

(DESCRIPTION)

Heading: Earnings and multiples can disintegrate rapidly in a deep bear market. 21.5 P-E multiple times $305 S&P earnings equals 6550. Bear market trough multiples often hit 14.5.

(SPEECH)

So let's start talking for the last 10 minutes about markets, earnings, and things like that.

We started the year with a 21.5 PE multiple on a projected $305 of S&P earnings. And that got you to $6,500. Just to show you how rapidly the cocktail napkin fundamentals of an equity market can disintegrate, in a bear market triggered by a deep recession,

(DESCRIPTION)

14.5 P-E multiple times $240 S&P earnings equals 3480. Implied about 20% in forward earnings.

(SPEECH)

multiples often trough closer to 14.5 than 21.5. And you also get a hit to earnings that can be something on the order of 20%.

So if we use a 14.5 multiple and $240 of S&P earnings, all of a sudden, you're at $3,500. And so that's how quickly the cocktail napkin math can disintegrate. I don't know that that's the most helpful way of looking at it, although it's something that you have to keep in mind.

This is the approach that I prefer to use.

(DESCRIPTION)

Heading: In a correction, the best catalyst for investors is always lower prices and the threshold of safety investors need in the face of a lot of unknowns. Chart heading: Realized return by investing in the S&P 500 on each day after a 15% drawdown has already occurred.

X-axis: year, 1950 to 2020 in increments of 10. Y-axis: Percent return after one year has passed since drawdown, negative 50 to 75 in increments of 25. Indistinct, jagged blue line.

(SPEECH)

The best catalyst for investors in a direction is always lower prices. And what kind of threshold do most investors need to jump back in, even in the face of massive amounts of unknowns?

So what this chart is showing is, what if you invested every single time there was a 15% drawdown? How would it have turned out? You didn't know what the future would hold. You didn't know if it was going to get worse. You just automatically invested. And this goes all the way back to the 1950.

And as you can see here from the distribution of when this happened, there were some times that things continued got to get worse. But most of the time, they didn't. And if we look at the distribution of the outcomes themselves, typically over the next year,

(DESCRIPTION)

Chart heading: Distribution of 1-year returns from investing in the S&P 500 on each day after a 15% drawdown has already occurred. X-axis: Return, from negative 50 to 70 percent in increments of 10. Y-axis: Count, from 0 to 1200 in increments of 200.

A red line stays flat at 0, then rises to below 200 at 20%, crossing 0% near 400 and peaking at 1000 near Text: Mean return, 12%, before declining to near 0 at 50% and thereafter. Red, 17%. Green, 83%.

Two column headings: Success rate, Drawdown. 83%, 15%. 87%, 20%. 93%, 25%.

(SPEECH)

you earned around 12%. And you made money around 85% of the time. And that's after a 15% drawdown. If you did it after 20% and 25% drawdowns, your success rates went up more.

I'm usually not a market technician like this. But I am when it comes to these kinds of major corrections because what I found is when markets start pricing in a recession, everyone around you can start thinking about all the ways that things could get worse. But they don't spend enough time thinking about the ways that they could get better and work themselves out. And given the peculiar, highly personalized way that this particular market collapse slash recession potential has been prompted, there are potentially paths to getting out of this that maybe some of us can't anticipate right now, which I think is why it's worth looking at stuff like this.

(DESCRIPTION)

Heading: And remember, in a correction-recession, equity prices generally recover way before GDP, payrolls, employment, housing, credit, real estate, etc.

Two charts shown. Left line graph Heading: Global Financial Crisis, index 100 equals March 31, 2007. X-axis: April '07 to April '13 in increments of 1 year. Y-axis left: 40 to 120 in increments of 10. Y-axis right: 94 to 108 in increments of 2.

(SPEECH)

And remember, in a correction and a recession, equity prices almost always recover way before GDP and payrolls and employment and housing and credit and real estate. These are some of the most important charts that we've ever built, that we've started creating them 15 years ago. And we use them as part of the way that we approach asset allocation.

So look at the chart on the left on the global financial crisis. The blue dotted lines, the S&P 500, that bottoms first. And a few quarters later, then earnings bottoms.

(DESCRIPTION)

Right line graph Heading: Stagflation of the 1970's, Equities versus earnings, payrolls and GDP. Index 100 equals June 30, 1973. X-axis: July '73 to July '75 in increments of 1 year. Y-axis left: 65 to 135 in increments of 10. Y-axis right: 97 to 105 in increments of 1.

(SPEECH)

Payrolls bottom a couple of quarters. After that GDP doesn't bottom until a couple of quarters after that.

And we see this pattern again and again. The stagflation recession of the '70s is on the right, same pattern. S&P bottoms way before the recovery and other things.

(DESCRIPTION)

Heading: A look across recessions, equities almost always bottom out first. Chart heading: Equities tend to bottom first during recessions. X-axis: months since beginning of recession, minus 8 to 32 in increments of 4. Y-axis: Covid, GFC, Dot Com, 1990's S and L, 1980's double dip, 70's stagflation, Eisenhower.

(SPEECH)

And I know this next chart looks like a circuit board. But this is a summary of all of the post-war recessions, and with one exception being the dotcom boom.

(DESCRIPTION)

Legend: Symbols, time of worst reading. Red diamond Equities, blue triangle ISM manufacturing survey, red square GDP, solid blue triangle Payrolls, yellow circle S and P earnings, blue square Housing starts, solid light blue circle High yield default rates, solid yellow circle Real Estate delinquencies, black circle end of recession.

(SPEECH)

The red diamonds generally tend to happen first, which means equities bottom first. And then later, ISM surveys, payrolls, earnings, housing starts, delinquency rates, high yield, default rates and things like that.

And so if we are staring down the barrel of a recession-- and certainly, the economists around Wall Street have all been ratcheting up their expectations-- it's important to remember that equities are going to bottom when it's still feels and sounds terrible.

A couple of last comments.

(DESCRIPTION)

Heading: Sometimes you get what you pay for. Chart heading: UK growth since Brexit. Real GDP growth, 2019 to 2024. Y-axis: 0 to 12% in increments of 2. UK in red at 2%.

(SPEECH)

So I couldn't not think about this over the weekend. Sometimes you get what you pay for. The UK, from 1970 to 2019, the UK was in the higher half of this chart in terms of GDP growth. And ever since Brexit, they've been next to last. And so sometimes, people vote for things without necessarily being able to project and understand what the macroeconomic consequences are.

And I want to thank you for participating and then just mention,

(DESCRIPTION)

Heading: Thanks for participating and a key difference versus 1991, 1998, 2001, and 2008. Here's the interesting thing about the stock market. It cannot be indicted, arrested or deported, intimidated, threatened, or bullied. It has no gender, ethnicity or religion, cannot be fired, furloughed, or defunded.

It cannot be primaried before the next midterm elections. It's the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation, and predictable rule of law.

(SPEECH)

there's a key difference in terms of how I've done this call versus how I would have done it and did do it in 1991 and 1998, 2001, 2008. And it has to do with this quote that I included in a piece last month.

This is the first time I've ever had to do a call where I had to think about the things that I was saying, not just in terms of how they reflect our views on markets and economics, but I had to think about how they might reflect on the firm and some of its colleagues at a time when people are being held accountable for their views and the things that they say in ways that they probably shouldn't be.

So I've said most of what I wanted to say on this call but not all of it. So anyway, thank you very much for participating. And we will be in touch when and if the tariff fundamentals or the application of the Liberation Day tariffs were changed. Thank you very much.

Thank you for joining us. Prior to making financial or investment decisions, you should speak with a qualified professional on your JP Morgan team. This concludes today's webcast. You may now disconnect.

[MUSIC PLAYING]

(DESCRIPTION)

Heading: Important information. This material is for information purposes only.